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Today, employees expect their employers to look after their well-being should something happen to their health.
Group disability insurance offers employers a cost-effective way to financially protect them from illnesses or injuries that disrupt their ability to work.
This article tells you everything you need to know about group disability benefit cover, including how it works, what it covers, its benefits and potential drawbacks, and how to set up a plan your employees will value.
What is Group Disability Insurance?
Group disability insurance is a type of disability insurance purchased by an employer for the financial well-being of their employees in the event of a disability.
Like personal disability insurance, a group plan replaces a portion of your pre-disability income — generally 60-80% — if you are sick or injured and can’t work. The difference is that group disability insurance policy is owned by the employer, not you.
The employer sets the terms of the plan, which is offered as an employee benefit. Participation is voluntary, similar to other workplace benefits. You may be able to buy additional coverage, but the disability cover is tied to your job. You’ll lose it when you lose or leave your job.
If you are disabled and can’t work, benefit payments will start after an agreed waiting period. These payments may continue until you resume work or the end of a specific period, which can be the standard retirement age or a certain number of years. Group disability insurance benefits are paid weekly or monthly.
You may also qualify for partial disability benefits in case you are only able to work part-time after recovering.
Types of Group Disability Insurance in Canada
Group disability insurance plans are either long-term or short-term.
Short-term disability insurance
Group short-term disability insurance covers a portion of pre-disability earnings if you are out of work on a disability claim. Short-term disability benefits are usually paid weekly and can last up to 12 months.
What conditions qualify for short-term disability vary by insurer, but most plans cover the following conditions:
- Mental health issues
- Musculoskeletal issues
- Injuries
- Hospitalization
- Recovery from an accident or a major surgery
Long-term disability insurance
Long-term disability insurance pays monthly benefits after a qualifying illness or injury. Benefit payments can last anywhere from one year to through retirement age, which is 65 in Canada.
While coverage details vary by insurance carrier, you can expect a plan to cover the following conditions:
- Serious injuries
- Musculoskeletal issues
- Serious mental health conditions (e.g. bipolar disorder)
- Major surgeries
- Cancer-related injuries
Short term vs. long-term group disability insurance
The main difference between these two group disability insurance coverages is the length of the benefit period. Benefit period is the amount of time for which you’ll receive disability benefits after a successful claim.
Group short-term disability cover kicks in almost immediately after a qualifying event, but it rarely pays benefit payments for more than a year. By contrast, while long-term disability covers have a much longer waiting period, they pay benefits over a longer term, often until the insured reaches the retirement age.
The following table highlights the similarities and differences between group short-term and long-term disability coverages.
How does group disability insurance work for employees?
Here are some facts about group disability insurance you need to know to be able to benefit from it.
What events and disabilities qualify for benefits?
Every insurer has their own list of events and disabilities that are covered. Your plan may also exclude certain conditions. Read the policy document to understand these details, as well as how the insurer defines the term ‘disability’. If you find policy wording complex, speak with HR or a representative of the insurance company to gain clarity.
How much is the elimination period?
All disability insurance plans, whether personal or group, short-term or long-term, have a waiting or elimination period. It refers to the number of days that must pass after you become disabled before you can start collecting benefit payments. This detail, too, is mentioned in the policy document.
Keep in mind you should file a claim right after a qualifying event or disability and not wait for the elimination period to be over. Waiting until the elimination period ends will only delay your payments, as insurers need time to check and approve a claim.
Who receives the disability benefit payments?
The insurer pays the benefits directly to you. The payouts are deposited directly into your account, similar to a paycheck.
How often do you receive disability benefits?
For short-term disabilities, pay outs are made weekly while long-term disabilities are paid monthly.
What you can use your disability benefit payments for?
Think of disability payments as your regular income. You can spend this money in any way you like. You can use it to pay medical bills, debts, home rent, groceries, childcare, daily living expenses, and more.
What happens if you return to work?
If you return to your old job and work-time, some policies will pay partial benefits while others will stop them completely. If you are able to work full-time, your disability benefits will stop.
Who pays for group disability insurance?
Generally, group disability insurance plans are paid in any of the following four ways:
- Employer pays the entire premium
- Both the employer and employees contribute to pay for the benefit. For example, the employer may pay 70% of the benefit cost and the employee remaining 30%. An employee’s contributions are deducted from their salary.
- The employer pays for the basic coverage and employees have the option to buy top-up coverage. For example, your employer may offer $100,000 in disability benefits free of cost. Because you have young kids and a mortgage, you decide to buy an additional cover of $200,000, which costs $3,900 a year. To maintain the top-up coverage, you must pay the annual premium directly to the insurer. If you default, you will lose the top-up coverage, though your basic coverage will remain intact.
- Employees alone pay for disability benefits. However, it’s pretty uncommon for employers to ask the employee to foot the entire bill for disability benefits. Most of the time, if a company decides to offer group disability insurance, it’ll chip in too. But even if you have to bear the entire cost, signing up for a group disability insurance policy is still a better deal than getting coverage on your own. Because risk is spread over a larger number of people, group coverage costs considerably less than comparable individual policies.
Benefits of having group disability insurance
Group disability insurance is beneficial for both employers and employees.
For Employers
- Tax benefit: If your company pays the premiums for your employees, that amount can be tax deductible, as long as they’re a reasonable business expense.
- Attract top talent: Offering a robust benefits package makes a company more attractive to potential employees. A survey found for 86% of employees a robust employee benefit package is the second-most important factor to accept or reject a job offer with health and wellness benefits being one of the most desirable benefits.
- Improve staff retention: Not only do most employees expect their employers to take an active role in their wellbeing, many are prepared to look elsewhere if the benefits package at their job is not up to their expectations. By showing your employees you’re interested in their and their family’s wellbeing, you can increase employee morale, boost productivity, and improve staff retention.
For Employees
- Affordability: Group disability insurance is more affordable that individual coverage, partly because the cost of premiums is usually split between the employee and employer and partly because the risk is spread across a larger group.
- Fewer exclusions: Group disability insurance involves less rigorous underwriting compared to individual plans. Even people with pre-existing conditions can get coverage without having to pay a higher premium than people without pre-existing illnesses or getting approved with a longer list of exclusions. In contrast, if you have a pre-existing illness and shop for an individual plan, chances are the insurer will either ask you to pay extra or approve you but not cover your pre-existing condition.
- Simpler claim process: Employees are eligible for cashless medical treatment at hospitals within the insurer's network, thereby streamlining the claim process.
- Coverage for employees’ dependents: Most group plans allow employees to add their dependents (spouses and minor children) to their plan. Depending on the group coverage details, this feature may be available as a free or paid add-on.
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Are there any drawbacks to to group disability insurance?
No financial product is perfect, and group disability insurance is no exception. Despite its numerous benefits, it has a few shortcomings. Knowing about them can help employees create a robust financial safety net to fall back on if life throws them a curveball in the form of a serious illness or injury.
- Limited coverage: Some group disability plans have a cap on how much you can receive each month. If you are a high-earner, this could leave you underinsured. Even if the group plan is designed to replace 50-60% of the employee’s salary, you would end up with way less because of that monthly limit.
- Not portable: Group health benefits, including disability coverage, are usually not portable. You’ll lose coverage when you switch jobs or get fired.
- Limited flexibility: Since the employer decides coverage details and riders, you might not be able to tailor the plan to your needs.
- Tax implications: If the employer pays for your group disability coverage, then any cash that’s paid out will be subject to tax. If the employer pays part of the premium, you’ll be taxed only the portion the employer pays.
If the group disability coverage doesn’t cover you adequately, consider supplementing it with a personal policy for well-rounded protection. It is portable, flexible, and has higher monthly maximums. Plus, the payout is tax-free.
How does group disability insurance policies define disability?
Group disability insurance defines disability in two ways:
Own Occupation
Under this definition, you are eligible for disability benefits if your injury or illness prevents you from performing the main duties of the occupation you had before disability.
Any occupation
Any-occupation policies pay if your injury or illness prevents you from performing the duties of any occupation for which you are reasonably qualified on the basis of your education and experience.
Group disability insurance policies define disability as either their own occupation or any occupation. Some plans follow their own occupation definition for the first 24 months of plan payments, after which they switch to any occupation.
This means for the first two years, you’ll receive disability benefits if you can’t do the main duties of your last job. After that, you’ll be eligible for benefits only if your disability is severe enough to prevent you from performing any job for which you are reasonably qualified.
How do I set up a group disability benefits plan?
Setting up group disability insurance is one of the most cost-effective ways to support your employees. Here’s how you can set up a plan that your employees will value.
- Find out the needs of your employees
- Decide the coverage details
- Compare pricing and offerings of multiple providers
- Decide the premium payment plan that works best for you and your staff
- Choose specific add-ons such as future increase option, cost of living adjustment, cost of living rider, and retirement protection rider
Conclusion
Group disability benefits insurance replaces a portion of an employee’s salary if they can’t work due to disability. A robust plan protects your employees from life’s what-ifs and helps you demonstrate that you care about them.
Working with an independent broker like Dundas Life can help you find the right coverage for your employees at an affordable price. Our experts can walk you through the entire group disability insurance buying process while offering transparent, unbiased advice.
FAQs
How much disability insurance coverage do I need?
Figuring out how much disability insurance you need is pretty simple. Just take your current paycheck, subtract any state benefits you’d receive and work expenses you'd save, then add potential extra costs if you get sick or hurt.
Is group disability insurance taxable?
The tax implications of your group disability insurance payout, depends on who pays for the plan. Three common scenarios are:
- You pay the entire premium, in which case no tax.
- Your employer bears the entire cost, in which case whatever money you receive from the policy will be taxed
- You and your employer share the cost of coverage, in which you’ll be taxed the portion your company pays
What is group long-term disability insurance?
Group long-term disability insurance provides employees with a steady stream of income if they get sick or injured and can’t work for an extended period of time.
What is group short-term disability insurance?
Group short-term disability insurance replaces part of your paycheck if you become disabled and can’t work for a short amount of time.
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